Arbitration a viable option for trade credit defaults

SA’s struggling economy, record unemployment rate and rising living costs continue to dampen consumer spending.

Consequently, businesses are grappling with constrained cash flow. The resultant liquidity shocks increase the risk that businesses will default on loans and trade credit agreements.

“In the trade credit environment, nonpayment of goods sold on credit to customers is on the rise. Even with the best agreements and supporting documents at hand, taking legal action against nonpaying debtors is a long and costly process, with no guarantees of payment,” says DebtSource attorney Martina Biecker.

Fortunately, third-party dispute resolution through the courts is not the only recourse for suppliers. Arbitration provides an alternative, private mechanism for dispute resolution outside the courts.

The Arbitration Act 42 of 1965 governs the process in SA. However, for the act to be enforceable, the parties must record their agreement in writing to arbitrate any dispute relating to a matter specified in their contract.

“Therefore, it is imperative that this is included in the credit agreement upfront as part of a credit application form, for example,” she says.

Furthermore, parties have the security of an administered system of carefully drafted Rules for Arbitration.

“The process involves submitting a dispute, by agreement from both parties, to one or more arbitrators who will make a binding decision on the dispute,” elaborates Biecker.

Arbitration is consensual, confidential and neutral as parties can choose elements like the applicable law, language and venue. The arbitrator’s decision is final and can be made an order of the court.

“As such, arbitration can be a more effective and efficient process than litigation. However, arbitration can only succeed if the contracting parties are desirous about resolving their issues, and it is often overlooked or frowned upon as either ineffective or too costly,” says Biecker.

Also, in many instances, the relationship between the parties in failed credit transactions has irretrievably broken down, which can create animosity.

To streamline the process and make it more appealing, a small arbitration procedure model was designed for commercial disputes related to values between R20,000 and R495,000.

The small arbitration process has its roots founded in terms of the act and is designed to be as cost effective and accessible as possible to businesses. The simplified small arbitration process requires the claimant to file a statement, which is then served on the respondent.

“The arbitrator’s fees are split between the parties. The arbitrator may request a prearbitration to limit disputes, or will deliberate the matter based on submissions only. The parties receive the arbitrator’s findings 14 days after the hearing. This offers a convenient and expeditious alternative to the delays, risks and costs associated with litigation.”